What Are the Benefits and Risks of a Savings Account?

Saving money allows you to prepare for large purchases, like buying a home or paying for college, but it can also come in handy in everyday circumstances. There are so many things you can't predict in life, and having even a little extra stashed away can mean you don't have to use a credit card to take care of an emergency. That not only saves you on the interest you would pay to the credit card company, but money in a savings account earns you interest.

Some employers offer an automatic savings plan.

Benefits and Risks of Different Accounts

There are different kinds of savings accounts and each comes with its own benefits and risks. A regular savings account has the benefits of letting you deposit money, earning you a small amount of interest, and letting you access your money easily with little or no fees. This makes it the ideal choice for a rainy day savings fund, or for saving up toward a vacation, but it comes with the risk that the amount of interest earned is small and may not be enough for your money to keep up with inflation over time. If you are saving for a long-term goal like retirement, consider an IRA, Individual Retirement Account. There are a lot of restrictions on IRAs, but the benefit is that you don't pay taxes on the money deposited, or the interest it earns, until you withdraw it. However, the risks here are that there are very stiff tax penalties if you withdraw your money before the age of 59. Different types of IRAs impose different penalties, so do your homework before you choose one.

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Emergency Funds

According to Sheila Blair, chairman of the FDIC, "Money alone can't buy happiness, but research shows that a cushion of savings really can provide such benefits as reduced stress and better relationships with family members." Knowing that you are prepared in case of an emergency reduces your list of things to worry about and, whether or not that helps you get along with your family, it can help you feel more secure. Just saving $20 a week adds up to $960 a year, and as that savings grows so do your returns. Many households are forced to turn to high-cost borrowing when a financial emergency turns up, and this loses you money in the interest you pay on borrowed funds.

FDIC Insured

Savings accounts are actually very low risk, as long as your bank is FDIC insured. The FDIC insures each depositor, meaning anyone who deposits money, for up to $250,000, per insured bank. In the cases of joint accounts, each contributor to the account is insured for $250,000, meaning that the account itself is insured for $500,000 (assuming each person contributed equally). However, keep in mind that in 2014 the standard coverage returns to its usual $100,000 for all accounts except for IRAs and certain other retirement accounts, which will continue at the higher rate. To find out if your bank is insured, or to locate an insured bank, you can visit the FDIC's Bank Find page listed in the resources.